Option Investor

Daily Newsletter, Wednesday, 1/4/2017

Table of Contents

  1. Market Wrap
  2. New Option Plays
  3. In Play Updates and Reviews

Market Wrap

Santa Is Late To the Party

by Keene Little

Click here to email Keene Little
I'm guessing Santa partied a little too hard in the days leading up to Christmas and he was too hung over to help the market rally in the final week of 2016. But he showed up the past two days to finish out the period known as the "Santa Claus" rally. Now we wait to see if he can make up for last week's loss.

Today's Market Stats

The first two trading days of January are typically bullish and this year has been no exception. The "January effect" is off to a good start and if the week finishes positive it will mean we should all buy LEAP calls and come back at the end of the year to collect our money. That is of course said with tongue firmly planted in my cheek since this hasn't exactly been an accurate indicator as of late. The idea is that the first week tells us how January will go and how January goes tells us how the year will go.

The trouble with this "indicator" is that the market is bullish more often than it's not and therefore the year is up more often than it's not. And the first week of January is generally bullish as new-month and Christmas/end-of-year bonus money gets put to work. The combination has been turned into the "January effect." But last January's strong decline was followed by a strong year for the bulls so it didn't work out too well for those who bought LEAP puts last year based on a negative start to the year. While it's fun to play with, like all indicators, don't put too much faith in just one.

The small caps continue to act strong, as can be seen in the table above. The RUT is up +2.3% in the first two trading days of the year while the Dow hasn't cracked +1% yet. SPX is up +1.4% and that's been good enough to drive the VIX down near -8% where it closed below 12 again. You can't time the market on the VIX but when it drops below 12, as it did twice in December, market tops soon follow. I'll show a weekly chart of the VIX further below.

This afternoon's release of the FOMC minutes from December created a little positive response from the market but after an initial reaction the indexes basically went back to sleep. The minutes reflect the fact that the Fed felt the strong post-election rally was a strong factor in the decision to raise rates. One wonders what they would have done if the market had sold off on the election of Trump. The minutes reflected the discussion about the desire of the Fed to steer clear of politics (cough) but that the market was clearly favoring the idea of an increase in the rate.

Following the election the bond market tanked (it had already been selling off since July but sold off hard after the election) and that spiked yields higher. As I've said repeatedly, the Fed doesn't dictate bond rates, the bond market does and the Fed follows. Whenever the Fed hasn't followed, such as with the long-depressed 0.25% rate, they have distorted the market and created bubbles. Today is no different but at least they're finally starting to respond to what the bond market is telling them. Since the low in bond prices around mid-December they've been bouncing back up, including today's rally, which has yields pulling back, and yet the stock market continues to press higher. Hmm, I wonder which one will win this battle...(hint, the bond market is the smarter of the two).

While Trump was not named specifically (there was probably a gag order not to mention his name), apparently the Fed recognized the impact of the election on the markets and the meaning of it for the economy. There's hardly agreement on where the economy is headed next and in their summary of the various economic projections they were clear to note "substantial uncertainty" about what the fiscal policy should be in the coming year. However, the minutes reflected the stock market's rally, saying "Asset price movements as well as changes in the expected path for U.S. monetary policy beyond December appeared to be driven largely by expectations of more expansionary fiscal policy in the aftermath of U.S. elections." In other words, the market expects higher rates so let's meet those expectations.

Part of the reason for further rate hikes is that the Fed believes the market is anticipating "the incoming Congress and Administration would enact significant stimulus measures." There was also concern by the Fed that many of these stimulus measures, such as infrastructure spending, could significantly lower the unemployment rate and that if the Fed did not start raising rates now they'll have to scramble later to raise rates more significantly and faster. In effect they're trying to head off improving conditions before they happen. There's only one problem with this approach -- the Fed has a perfect record of Never forecasting the economy correctly. It continues to baffle me why the market pays any attention to these economic boobs who could not forecast their way out of a wet paper bag, even if the bag was ripped open for them.

I suspect the stock market's euphoria over expectations for what the Trump Administration and Republican-led Congress will be able to do will turn to disappointment as soon as the sausage-making process of governing makes it clear that there's going to be little change. Do you remember "Hope and change you can believe in" eight years ago? The sentiment in the post-election rally fits as the last hurrah of a long bull market and it's quite likely that the disappointment will settle in quickly and the November rally will turn to dust. But that's just my opinion and we'll let the charts speak for themselves, starting with a weekly view of the VIX.

Volatility index, VIX, Weekly chart

In the final week of December, when Santa was a no-show, the VIX had bounced up to resistance at its broken uptrend line from 2014. This trend line might not be that important, considering the number of breaks and recoveries in 2016, but at 14 it was also the location of the downtrend line from June 2016 and the reversal from these two trend lines looks bearish for VIX, which is of course bullish for the stock market. The risk for the stock market is that previous declines below 12, which is where the VIX closed today, has been followed shortly thereafter by a more significant pullback/decline. But if we are into the last hurrah for the stock market rally I see the potential for the VIX to drop down to its 2005-2007-2014 lows near 10. That would truly be a scary time to be long the market.

S&P 500, SPX, Weekly chart

At today's high SPX once again has tested the potentially important Gann Square of 9 2271-2273. As mentioned for the past few weeks, this area "vibrates" off the 2009 low, for both time and price, and is therefore an important level to see how the index behaves around it. From a weekly perspective, with a 5-wave move up from February, the rally can be considered complete at any time and now it's just a matter of looking at the short-term charts to see if they support further upside or a reversal at any time. If the rally continues into next week keep an eye on two price projections, which are based on the relationships between the waves in the rally from February, near 2285 and 2292. Slightly higher is the top of a rising wedge pattern for the rally from February, near 2300.

S&P 500, SPX, Daily chart

The daily chart shows how SPX has been stalled at the Gann 2271-2273 level since reaching it on December 13th. The highest closing price so far is the December 13th close at 2271.72. For the rally from November 4th, the 5th wave of the move would equal 62% of the 3rd wave at 2289, which lines up with the two projections on the weekly chart at 2285 and 2292. And then as mentioned above, if it can rally up to its trend line along the highs from April-July/August 2016 we could see 2300 next week. Any new highs, or a truncated high here, with a lower MACD high would be a signal to get ready to short it for at least a larger pullback but at the moment it's too early to be thinking short since we could see this rally continue into next week. Just don't be complacent about the upside.

Key Levels for SPX:
- bullish above 2278
- bearish below 2233

S&P 500, SPX, 60-min chart

Last Friday's decline was a drop below a parallel down-channel for the pullback from December 13th (bull flag) but that turned into a head-fake break (throw-under completion to the pullback correction). SPX is now challenging the top of the down-channel as well as the Gann 2271-2273 level. A break above 2273 would therefore be at least short-term bullish and if we get a 5-wave move up from last Friday, as depicted in green, we'd have a very good setup to get short for the coming reversal.

Dow Industrials, INDU, Daily chart

I don't have much in the way of upside targets for the Dow and think it's probably best to watch some of the other indexes to watch for a possible high. One upside target, assuming the rally will continue, is a trend line along the highs from August-December 2016, which will be near 20250 next week. Last Friday's decline was to the 20-dma, currently nearing 19850, and as long as that MA continues to support pullbacks I'd keep looking higher. But a close below its 20-dma would be a bearish sign.

Key Levels for DOW:
- bullish above 19,981
- bearish below 19,718

Nasdaq Composite index, COMPQ, Daily chart

In last week's update I pointed out some significant resistance for the Nasdaq where it's currently trading. But the pattern continues to support the need for one more leg up to complete the rally from November and in turn the one from February. A trend line along the highs from April-September 2016 (the top of a rising wedge for the rally from February) will be near 5615 by the end of next week and it's the upside potential from here.

But the bulls could run into trouble at lower prices -- the uptrend line along the highs from August-September 2016 is where the rally into the December 27th high stopped and that line will be near 5536 by the end of this week. While I show the key level for the bulls to break is 5513 (just above the December 27th high), I would carefully manage long positions with a tighter stop since failure of the rally could happen at any time. Between the trend line at 5536 and the higher one at 5615 (next week) is the top of a rising wedge for the rally from November, which will be near 5565 early next week. It's the middle target, at 5565, that I'm depicting on the chart.

Key Levels for COMPQ:
- bullish above 5513
- bearish below 5371

Nasdaq-100, NDX, Daily chart

While I'll continue to give the bulls the benefit of the doubt I do want to highlight a bearish setup on NDX. I show upside potential to the 5000 area (back to the top of a parallel up-channel for the rally from November) but first I want to see it can get above resistance just below 4950. This is where the trend line along the highs from July-October 2016 is located, as well as the broken short-term uptrend line from December 16th. The two lines crossed today near 4945, which is where today's rally stopped. The bounce off last Friday's low is only a 3-wave move and as such it could be just an a-b-c bounce correction to what is a new downtrend off the December 27th high. If long the tech indexes I think it's a good idea to tighten your stops.

Key Levels for NDX:
- bullish above 4950
- bearish below 4885

Russell-2000, RUT, Daily chart

Today's rally for the RUT had it breaking its downtrend line from December 9th, currently near 1374, and the setup continues to look good for a rally up to its trend line along the highs from 2007-2015, currently near 1405. This is the top of what appears to be a large megaphone pattern since 2014, which fits as a bearish topping pattern. The top of a parallel up-channel for the rally from February crosses this trend line along the highs next Tuesday at 1405. Above 1410 would be a bullish breakout and considering MACD is rolling up from the zero line we have to consider the bullish potential for that to happen. But if we see the 1405 area tested and hold as resistance it would produce a higher price high with a lower MACD high (bearish divergence) and that would be a good setup to trade the short side.

Key Levels for RUT:
- bullish above 1410
- bearish below 1355

20+ Year Treasury ETF, TLT, Weekly chart

Keeping an eye on the bigger picture for bonds, the TLT weekly chart shows the bounce off support at its uptrend line from 2011-2013 and is now approaching its steep downtrend line from September-November 2016, currently near 121.20 (today's high was 120.24, so another point higher). Its bounce has TLT back-testing its broken 200-week MA at 120.21. The pattern of the bounce supports the idea that we'll see another leg down for the selloff in bonds and perhaps we'd see a test of the June 2015 low at 114.88.

But with the weekly MACD turning up from oversold (and the daily MACD climbing above zero) it continues to be a good setup for at least a higher bounce for bonds. The longer-term pattern continues to support the idea that the long-term bull market is not over yet and now that the uptrend line from 2011 has been tested, and held, we're starting the next leg up in the bull market. Upside potential is to the top of its long-running rising wedge, which is the trend line along the highs from 2008-2012. That line will be near 146 around mid-year. That's not a prediction (yet) but it's the upside potential if you're short TLT (perhaps through an inverse bond ETF, such as TBT) and willing to hold on through the bounce.

KBW Bank index, BKX, Weekly chart

The banks continued to show relative strength yesterday and today and with yesterday's and today's higher highs it has continued to make new all-time highs by pushing above its December 8th high at 93.65. The consolidation off that high looks complete at last week's low and now we could see a rally up to a price projection at 97.07 and maybe up to just above 100 by next week. The 97.07 price projection is where the 5th wave of the rally from 2009 (the leg up from February) would equal the 1st wave but it's not a clean wave count for that projection so it's just a level of interest. The broken uptrend line from February-April 2016, which was broken in June, is where the rally into the December 13th high stopped and by the end of next week that line will be near 100, which makes for a good projection (nice round number at the century level as well).

Transportation Index, TRAN, Daily chart

While the Dow struggles to test its December highs (19985 on December 21st) the TRAN has barely been able to get a bounce started. It made a lower low for its pullback yesterday and while it did OK today (+1%) it's nowhere near its December 9th high. So at the moment we have small bearish divergence between the two and if the TRAN is unable to climb back above its November 2014 high at 9310, which would have it back above its two parallel up-channels, from January and June 2016, it's going to keep the TRAN more bearish than bullish.

U.S. Dollar contract, DX, Weekly chart

The US$ has been struggling with the 103 area, which I've been discussing the past few weeks. A 127% extension of its previous decline (March 2015 - May 2016) is at 103.27 and the 2nd leg of the rally from May 2016 is 162% of the 1st leg at 103.33. There have been multiple attempts over the past 13 trading days, including today, to get over this level but the highest close so far is 103.26 on December 20th, 103.23 on December 28th and 103.22 yesterday. It's either a bullish sideways choppy consolidation since December 15th or it's topping and we'll see at least a larger pullback and potentially something a little more bearish into April-May. But if the dollar can close above 103.33 I'd turn at least short-term bullish

Gold continuous contract, GC, Daily chart

With today's high at 1168.60 gold has back-tested the bottom of a parallel down-channel from last July's high. Oftentimes we'll see price bounce back up to the bottom of a broken down-channel (or pull back to the top of a broken up-channel) for a back-test and then resume the trend (down in this case). Slightly higher is price-level S/R near 1180 and gold stays bearish below that level.

Oil continuous contract, CL, Daily chart

Tuesday morning oil popped up in the pre-market session but then sold off sharply when the cash market opened. The day produced an outside down candle as it engulfed the previous week's price action, which has it looking like a bearish reversal. Yesterday's higher price high was met with a lower MACD high. One reason I say we could be looking at an important reversal back down is because the early-morning high achieved a price projection near 55 (with a high at 55.24) that I've mentioned the past few weeks. A 127% extension of its previous decline (June-August) is at 55.06 and two equal legs up from August is at 54.94. Both cross the top of a parallel up-channel for the rally from August this week. So the bearish reversal yesterday has the potential to mark an important top. That makes today's bounce a shorting opportunity with a stop just above yesterday's high.

Economic reports

Thursday morning will be a little busier for economic reports but probably not market moving. The ADP Employment Change report for December is expected to show a decline from November but nothing drastic. Other than the unemployment claims data we'll also get the ISM Services report, which is expected to be flat from November. Crude inventories, announced later in the morning could move crude prices and since it's looking like prices are set to drop we'll see if we got an increase in inventories that are more than expected. Friday is the big day with the NFP report but again, no big change is expected from November so it would take a significantly lower number to start lips babbling about the Fed not being able to raise rates any more, etc. We'll also get reports on Factory Orders (expecting a decline) and housing starts and permits (expecting flat to lower).


The S&P 500 index is up +1.4% for this week and that shows us Santa at least arrived for the conclusion to the Santa Claus rally period. Now we wait to see if the typical swoon following this period will hit the market with selling. The rallies the past two days have not been impressive because they were created largely during the overnight sessions and then not much, if anything, added during the regular trading hours. This gives it the appearance of distribution instead of accumulation.

The chart patterns support the potential for the rally to continue into next week. Using SPX as our proxy, if it can close above 2273 I see upside potential to 2285-2295 and maybe 2300. But it's important to recognize the fact that we should be into the final leg of the rally from November, which will complete the final leg of the rally from February. It's going to be an important high and that's what makes it very important not to get caught long by ignoring stops. It's too early to get short but we're in a position where we need to protect long positions rather than be aggressive on the long side. It's a good time for caution by both sides.

Assuming we'll get at least a larger pullback once the rally completes in the next week or so (if not already complete) we'll have time to evaluate the pullback to see if it's looking more like a correction to the rally or something more bearish. Future trades will then be planned based on that analysis. Both sides have time to evaluate the price action over the next couple of weeks before establishing a trade for a bigger move, which means risks should be kept small for now.

Good luck and I'll be back with you next Wednesday.

Keene H. Little, CMT

In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying

New Option Plays

Resistance Test

by Jim Brown

Click here to email Jim Brown

Editors Note:

The major indexes rebounded to resistance but none of them broke out. While that could happen on Thursday if the bullishness continues, the retirement fund flows into the market should be behind us. Tuesday and Wednesday were the last two days of the 7 day Santa Rally period. Thursday could see either a failure at resistance or a breakout. We have had two trading days this week and that is still not a trend.

I went through my list of potential plays and there was nothing that simply had to be played today. There were two kinds of charts. Some small caps had 5% to 10% spikes over the last two days and took themselves out of contention for a new play in an overextended market. The second type was the S&P-500 clone. Like the chart below they had rallied back to resistance but then stalled.

I know it is boring not to have any new plays but we need to be patient. When the market does not move in the expected direction, a lot of people begin to get nervous and I am sure we are seeing some short covering from those impatient shorts. I am not going to recommend anything for Thursday because 2017 is only 2-days old. There is no "must trade by date" and we need to be patient.


No New Bullish Plays


No New Bearish Plays

In Play Updates and Reviews

Rebound Rally

by Jim Brown

Click here to email Jim Brown

Editors Note:

There is a strong possibility the party is not over with the indexes moving back to their highs. The Dow ran into the same strong resistance just over 19,950 and stalled but the Nasdaq had a good day and moved closer to a new high. The Russell 2000 had a blowout 31 point gain and closed only 1 point below its prior high. With the Russell as our market sentiment indicator it would appear the January bears have gone into hibernation. We still have the Dow 20K target to hit and see what reaction that brings before we can put our bullish horns back on. Two days do not make a trend especially when the last two days are the strongest retirement fund inflows for the year.

The rest of the week will be key for market direction.

Current Portfolio

Stop Loss Updates

Check the graphic below for any new stop losses in bright yellow. We need to always be prepared for an unexpected decline.

Profit Targets

Check the graphic below for any profit stops in green. We need to always be prepared for a profit exit at resistance.

Current Position Changes

MAT - Mattel Inc

The long put position was stopped out at $29.15.

If you are looking for a different type of option strategy, try these newsletters:

Credit spreads and naked puts = OptionWriter

Long term option investments = LEAPS Investor

3-6 month Option Trades = Ultimate Investor

Iron Condors = Couch Potato Trader

Long and short equity trades = Premier Investor

BULLISH Play Updates

No Current Bullish Plays

BEARISH Play Updates (Alpha by Symbol)

CAT - Caterpillar - Company Profile


No specific news. No participation in the bullish market. Closed at the low for the day.

Original Trade Description: December 17th

Caterpillar Inc. manufactures and sells construction and mining equipment, diesel and natural gas engines, industrial gas turbines, and diesel-electric locomotives worldwide. The company's Construction Industries segment offers backhoe, small wheel, skid steer, multi-terrain, compact track, medium and compact wheel, and track-type loaders; mini, wheel, and track excavators; track-type tractors; and select work tools, motor graders, telehandlers, soil compactors, and pipelayers, as well as its related parts for the heavy and general construction, rental, mining and quarry, and aggregates markets. Its Resource Industries segment provides electric rope and hydraulic shovels; draglines; drills; highwall and longwall miners; hard rock vehicles; articulated, large mining, and off-highway trucks; large wheel loaders; wheel tractor scrapers; wheel dozers; machinery components; hard rock continuous mining systems; electronics and control systems; and select work tools for use in mining and quarry applications. The company's Energy & Transportation segment offers reciprocating engines, generator sets, marine propulsion systems, gas turbines and turbine-related services, diesel-electric locomotives, and other rail-related products and services. Its Financial Products segment provides retail and wholesale financing for Caterpillar equipment, machinery, and engines; offers property, casualty, life, accident, and health insurance; insurance brokerage services; and purchases short-term trade receivables. The company's All Other segments remanufactures Cat engines and components, and provides remanufacturing services for other companies; offers business strategy, and development, management, manufacturing, marketing, and support primarily for paving, forestry, industrial, waste, and Cat products. Company description from FinViz.com.

Caterpillar's business has been in decline for several years as the energy sector went into hibernation and Asia's economic growth appeared to slow. For some reason, the stock bottomed on January at $58 and rallied to almost $100 despite a weak outlook in every earnings cycle. The $18 post election bounce was just another example of irrational exuberance. The election did not sell more tractors overnight and a pickup in their business could be several quarters away.

The best thing Caterpillar has in its favor is OPEC's decision to cut production. That means a year from now oil prices may have recovered slightly and energy companies may begin to buy more tractors. That is a long time off for an $18 spike.

Earnings in 2014 were $6.38, 2015 $4.64, 2016 they are estimated to be $3.26 and for 2018 analysts expect $3.15. However, CAT said last week that the estimates were overly optimistic. While Asian sales may have quit declining there is no material rebound at present.

Earnings Jan 24th.

This is a play on the retracement of that $18 bounce. When the company says analyst expectations are overly optimistic you can bet analysts will begin to lower their numbers. That should produce an extra weight on the stock in addition to any normal decline with the Dow in January.

The earnings are Jan 24th and the February options are expensive. Since this is a short-term position, I am recommending the January options. I believe any material decline will happen in the first two weeks of January.

Position 12/19/16:

Long Jan $90 put @ $1.89, see portfolio graphic for stop loss.

DIA Dow ETF - ETF Profile


No material news. The Dow posted a minor 60-point gain after stalling at the 19,950-19,975 resistance once again. We are back in range to possibly tag that 20,000 number but it could still be a sell the news event.

Original Trade Description: December 7th

The SPDR Dow Jones® Industrial Average ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Dow Jones Industrial Average.

Remember Dow 10,000? Traders talked about it for weeks. When it was finally hit, they were passing out Dow 10,000 hats on the floor of the NYSE for a week. That was December 11th 2003. It was a big milestone for the market.

Now 13 years later we are about to double that with Dow 20,000. Given the place on the calendar, the massive post election rally and the potential for normal profit taking in January, the Dow 20,000 touch could be a massive sell on the news event.

However, we are only 386 points way and it could happen as soon as next week. The Fed rate announcement on Wednesday could either cripple that potential or accelerate it if the Fed maintains a dovish posture on future rate hikes. I believe we will hit Dow 20K before the end of December. When that happens I want to be short the DIA ETF and plan on holding it through January.

I am choosing the Dow because it is the most overbought and could produce the biggest percentage move. Just look at Goldman's chart and the profit that needs to be removed there.

Because there will be plenty of other traders thinking along the same lines I want to enter the put position at 19,900 or $199 on the DIA ETF. I know I am jumping in front of a speeding train to enter a short position on a runaway market but the potential is very high for a good trade.

Position 12/12/16:

12/12 - 1/2 position: Long Feb $195 put @ $3.40, no initial stop loss.

12/13 - 1/2 position: Long Feb $195 put @ $3.15, no initial stop loss.

DRI - Darden Restaurants - Company Profile


No specific news. Only a minor gain in a bullish market.

Original Trade Description: December 20th

Darden Restaurants, Inc., through its subsidiaries, owns and operates full-service restaurants in the United States and Canada. As of May 29, 2016, it owned and operated 1,536 restaurants, which included 843 Olive Garden, 481 LongHorn Steakhouse, 54 The Capital Grille, 65 Yard House, 40 Seasons 52, 37 Bahama Breeze, and 16 Eddie V's restaurants. Company description from FinViz.com.

Darden Restaurants (DRI) reported earnings on Tuesday of 64 cents that beat estimates by a penny. Revenue of $1.64 billion missed estimates for $1.65 billion. They guided for the full year 2017 to earnings of $3.87-$3.97 per share. Same store sales growth was choppy. Olive Garden saw +2.6%, Longhorn Steakhouse +0.1%, Capital Grille+1.2%, Eddie V's +2.7%, Yard House +0.7%, Seasons 52 -0.3% and Bahama Breeze +2.6%. Shares spiked $2 on the news but faded in the afternoon to close negative. Darden had rallied 23% since the election.

The idea behind the rally was the end of the push for a $15 per hour minimum wage. When Clinton lost, that effort turned into wishful thinking because republicans have held the view that a lower wage offers entry level workers an opportunity and they can move up in the organization if they are qualified and work hard. Was that worth a 23% rally in Darden shares? I find it hard to believe.

Now that Darden earnings are over, we should expect a couple weeks of post earnigns depression and given the recent rally and the chance for a market decline in early January, the Darden drop could be significant.

Position 12/21/16:

Long Feb $72.50 put @ $1.55, see portfolio graphic for stop loss.

GATX - GATX Corporation - Company Profile


No specific news. Big rebound from the two-week low but prior support at $62.50 is now resistance.

Original Trade Description: December 15th

GATX Corporation leases, operates, manages, and remarkets assets in the rail and marine markets in North America and internationally. The company operates in four segments: Rail North America, Rail International, American Steamship Company (ASC), and Portfolio Management. The Rail North America segment primarily leases railcars and locomotive, as well as other ancillary services. This segment also offers repair, maintenance, modification, and regulatory compliance services on the railcar fleet. The Rail International segment leases railcars, as well as offers repair, regulatory compliance, and modernization work for railcars. The ASC segment operates a fleet of vessels that provide waterborne transportation of dry bulk commodities, such as iron ore, coal, limestone aggregates, and metallurgical limestone for steel makers, automobile manufacturing, electricity generation, and non-residential construction markets. The Portfolio Management segment is involved in leasing, asset remarketing, and marine operations, as well as manages portfolios of assets for third parties. As of December 31, 2015, it operated a fleet of 17 vessels; a fleet of approximately 106,100 cars; a fleet of 18,400 boxcars; and a fleet of 611 older four-axle and 26 six-axle locomotives. Company description from FinViz.com.

There has been no news since the company announced a 40 cent dividend on Oct 28th. The dividend is payable on Dec 31st to holders on Dec 15th. That is today. That means nobody else is going to be buying the shares to get the dividend.

Earnings Jan 19th.

GATX has rallied 69% since the election. I can only assume it was because of the rally in the Dow Transports in anticipation of a better economy in 2017. There is no current fundamental reason for a 69% rally and odds are good once the stock begins to roll over with the market it could fall very hard. Apparently other investors believe the same way since the only put strike with any volume is the January 60 puts. There is more volume in that one strike than all the other strikes combined.

Position 12/16/15:

Long Jan $60 put @ $2.35, see portfolio graphic for stop loss.

MAT - Mattel - Company Profile


Mattel continued its gains after the announcement of the virtual intelligent assistant for babies on Tuesday. We were stopped out at $29.15. That was a good announcement from Mattel and they should do well with the product.

Original Trade Description: December 28th

Mattel, Inc. designs, manufactures, and markets a range of toy products worldwide. The company operates in three segments: North America, International, and American Girl. It offers dolls and accessories, vehicles and play sets, and games and puzzles under the Mattel Girls & Boys brands, including Barbie, Monster High, Disney Classics, Ever After High, Little Mommy, Polly Pocket, Hot Wheels, Matchbox, CARS, Disney Planes, BOOMco, Radica, Toy Story, Max Steel, WWE Wrestling, and DC Comics. The company also provides its products under the Fisher-Price brands, such as Fisher-Price, Little People, BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, Disney Jake, the Never Land Pirates, and Power Wheels. In addition, it offers its products under the American Girl brands comprising Truly Me, BeForever, and Bitty Baby; and construction, and arts and crafts brands, such as MEGA BLOKS, RoseArt, and Board Dudes, as well as publishes the American Girl magazine. Mattel, Inc. sells its products directly to consumers via its catalog, Website, and proprietary retail stores, as well as directly to retailers, including discount and free-standing toy stores, chain stores, department stores, and other retail outlets; to wholesalers; and through agents and distributors. Company description from FinViz.com.

Retail surveys showed a 9% decline in toy sales over the holiday shopping season. Several of the high profile toys that did sell, suffered serious glitches that have buyers burning up the phone lines wanting refunds and/or replacements.

Zacks downgraded Mattel to a sell saying earnings growth at Mattel, even before the holiday disaster, was only 3.1% compared to the industry average of 21.2%. For the current year Mattel is only expecting 1.2% growth and that was before the holiday news. The company has already projected sales for 2016 to decline -1.9% and that forecast is sure to be revised lower. Analyst earnings estimates were already moving lower and the holiday sales news should accelerate that trend.

Toymakers are facing something called "age compression." Previously the age range for Barbie toys was 3 to 9 years. Now that has compressed to 3 to 6 years. Electronic games are making kids smarter and taking up a large percentage of their playtime. Toys are being left in the toy box. This is good news for companies like ATVI and EA but bad news for Mattel.

The company is also vulnerable to the strong dollar because of sales overseas. The dollar is at 14 year highs and Q4 earnings are going to be impacted.

Earnings January 18th.

This is going to be a short play. With earnings on the 18th, we are going to use a February option and we will exit before the earnings report. The expected market decline in early January should accelerate any drop in Mattel shares.

Update 1/3/17: Mattel spiked on the announcement of a smart baby monitor named Aristotle. It is similar to Amazon's Echo/Alexa. Mothers can reorder diapers, formula, etc, have it play music for the baby, soothe infants back to sleep, read bedtime stories, play games and teach toddlers different words. It has an HD camera for observation from another room. This device will cost $300 and will begin selling this summer. This is actually a very good move for Mattel and the stock decline could be over. Announcement

Position 12/29/16:

Closed 1/4/17: Long Feb $27 put @ $1.30, exit 65-cents, -.65 loss.

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